Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Haemonetics Corporation ( NYSE:HAE ) with a market-capitalization of US$4.8b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine HAE’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into HAE here .
Does HAE produce enough cash relative to debt?
HAE has built up its total debt levels in the last twelve months, from US$287m to US$344m , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$200m for investing into the business. Moreover, HAE has generated US$204m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 59%, indicating that HAE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HAE’s case, it is able to generate 0.59x cash from its debt capital.
Can HAE pay its short-term liabilities?
Looking at HAE’s US$189m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$553m, with a current ratio of 2.92x. For Medical Equipment companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does HAE face the risk of succumbing to its debt-load?
With debt reaching 49% of equity, HAE may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if HAE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HAE, the ratio of 13.78x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving HAE ample headroom to grow its debt facilities.
HAE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around HAE’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure HAE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Haemonetics to get a better picture of the mid-cap by looking at:
- Future Outlook : What are well-informed industry analysts predicting for HAE’s future growth? Take a look at our free research report of analyst consensus for HAE’s outlook.
- Valuation : What is HAE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HAE is currently mispriced by the market.
- Other High-Performing Stocks : Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here .
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org .